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Commentary: AT&T-BT merger inevitable

Recent reports of a breakdown in merger talks between AT&T and British Telecommunications may come as a disappointment to some, but Gartner believes a merger of the two giants is inevitable.

    By Ken McGee, Gartner Research Fellow

    It's a question of when, not if.

    Recent reports of a breakdown in merger talks between AT&T and British Telecommunications may have come as a disappointment to some industry observers, but Gartner continues to believe that a merger of the two telecommunications giants is inevitable.

    See news story:
    BT says discussions with AT&T continue
    Driven by the need to take advantage of emerging profit opportunities in the new economy--and to sustain investor loyalty--the two companies have practically no choice.

    The need to satisfy investors' expectations is a key driver for a merger. By the end of this decade, AT&T and BT will have to derive less than 50 percent of their total revenues from their legacy telecommunications carrier activities to keep their investors happy. A merger offers the only viable opportunity for the two companies to achieve that goal.

    Moreover, the AT&T and BT corporate cultures are sufficiently similar so that merging them would be comparatively easy. Most important of all, the benefits of increased cash flow from their consumer divisions would help them move into new areas. For example, the merged company would have an unparalleled opportunity to move beyond the old companies' core businesses as telecom "pipe" providers offering bandwidth, to become an e-commerce facilitator for business-to-business and business-to-consumer transactions.

    Because of previous failed attempts to expand their global market clout--AT&T's multiple global alliances and BT's unsuccessful bid to acquire WorldCom--the two companies would likely seek "buy-in" from all key stakeholders before they proceed down the merger path. Another failure would hurt both companies domestically and globally.

    Gartner's Dataquest group believes the Concert joint venture would not have been pursued in the first place if both companies had not been considering an eventual merger. The timing now is propitious because: • Working relationships between key management levels at AT&T and BT have now been tested sufficiently via their Concert joint venture.

    • Both companies find themselves under pressure from shareholders because of lackluster performance and unfulfilled promises.

    • Concert must move to the next level, which requires greater commitment than both parties would be willing to undertake without a closer union.

    • Critical decisions regarding spinoffs and market focus are coming to a head in both companies.

    Gartner predicts that if both companies were to proceed with a merger, the chances would be good that the merger would be approved on both sides of the Atlantic without serious reservation, for the following reasons: • BT is not government-owned, so it would not meet the same opposition as other foreign carriers--e.g., Deutsche Telekom--from the Federal Communications Commission and the U.S. Congress.

    • BT has convinced U.S. federal regulators that it will open its networks to competition and is in compliance with World Trade Organization agreements.

    • In the United States, no business entity or group opposed to the merger has sufficient clout and perseverance to force regulators to kill the merger.

    • Neither BT nor AT&T are dominant in Europe, so the European Union would not have extensive issues.

    All these factors present an irresistible opportunity for AT&T and BT--and generally ensure that the two companies will work out any differences that still stand in the way of a merger.

    Entire contents, Copyright © 2000 Gartner Group, Inc. All rights reserved. The information contained herein represents Gartner's initial commentary and analysis and has been obtained from sources believed to be reliable. Positions taken are subject to change as more information becomes available and further analysis is undertaken. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of the information. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof.